Investors are often interested in businesses with strong Intellectual Property (IP) protection because it can provide a competitive advantage by granting the creator exclusive rights over their creations, which can be valuable assets for a business. In addition, IPs are also important as they strengthen the brand by building its asset value for an exit or funding round. They act as remedies against unauthorized copying and unfair competition, providing the company with a lawful monopoly in key business areas. But is acquiring patents the only important aspect of a full-proof IP strategy?
Before getting into the process of acquiring patents, businesses need to lay down a clear roadmap for their IP strategy that includes identifying and owning the relevant IPs. Patents need to be filed early and strong brand trademarks need to be chosen. Trade secrets need to be guarded by enforcing NDAs and Copyrights need to be registered in advance. Brad Frazer, commercial litigator, author, and partner at Hawley Troxell, shares from his vast experience as a Senior IP Counsel about the different IP buckets investors need to consider as part of their due diligence before writing a check.
The need for more than just Patents
Although patents add immense value to a company, they are expensive and can take a long time to acquire. Patent filing in the U.S. is divided into three categories; Utility Patents (Inventions), Design Patents, and Plant Patents. The graph below represents the total patent applications received by the U.S. Patent and Trademark Office (USPTO) for each category between 2016-2020. While Utility Patents accounted for the highest number of applications among all patent categories, with nearly 600,000 applications each year, the USPTO granted patent rights to only 50% (approx) of the total applications it received.
This disparity in patent applications vs patents granted does not make filing for patents any less important. It just means businesses need to focus on other forms of IP as well to catch the interest of investors. So using Frazer's bucket metaphor, let's look at what are these other forms of IP that are equally if not more important than patents.
Legal ownership of creations with Copyrights
Copyrights are a form of IP protection that grants the creator exclusive rights to their original works of authorship, such as books, music, software, and artwork. Investors may be interested in businesses with strong copyrights because they can provide a competitive advantage and increase the value of the business. For example, a software company with copyrighted code can prevent competitors from using the same code, giving them an advantage in the market. The Google v. Oracle Supreme Court case study is an outstanding example that explains nuanced details associated with copyright protection laws in the US and the importance of registering for copyrights.
Establish brand recognition and loyalty with Trademarks
Trademarks are symbols, logos, or even social media accounts used to identify and distinguish a brand's products or services from those of others. Trademarks can be registered with the USPTO to obtain exclusive rights to the mark. Investors are often interested in businesses that own strong trademarks because they can create brand recognition and loyalty, which leads to increased sales and revenue. Let us consider the popular social media platform, Instagram as an example. Founded in 2010, Instagram's success was largely attributed to its trademarked logo and patented filters that allowed users to enhance their photos. This IP protection gave Instagram a competitive advantage in the market, as competitors could not replicate the brand recognition and photo filters without permission. In 2012, Instagram was acquired by Facebook for $1 billion, highlighting the significant value that IP protection can provide for early-stage investors.
Protect the winning formula with Trade Secrets
Trade secrets are a form of IP that protect valuable confidential information, such as formulas, processes, recipes, and other proprietary information that give a business a competitive edge in the market. From an investor's perspective, trade secrets can be a crucial asset for a company, providing a significant advantage over competitors and potentially increasing the company's value.
i) Coca-Cola Recipe: The formula for Coca-Cola has been kept confidential since its creation in 1886. The recipe for the popular soda is a well-known trade secret, known only to a select group of people at the Coca-Cola Company, and they take great measures to protect it.
ii) KFC's 11 Herbs and Spices: The recipe for Kentucky Fried Chicken's original fried chicken is another famous trade secret that has been kept confidential since the company's creation in 1952. The recipe allegedly contains a secret blend of 11 herbs and spices, which has never been publicly revealed.
iii) Google's Search Algorithm: Google's search algorithm is a valuable trade secret that the company has never disclosed. The algorithm is what makes Google's search engine so effective, and its confidentiality is key to maintaining Google's dominant position in the search engine market.
Whether you are a CEO of a company that is at a pre-launch stage or an investor carrying out due diligence, it is important to be aware of the various IP strategies. Most early-stage companies' valuation arises from all the intellectual property they possess in addition to the issued patents.
About the Speaker: Brad Frazer is a 1985 cum laude graduate of Brigham Young University (Provo; National Merit Scholar) and a 1988 graduate of the University of California, Hastings College of the Law. Brad is now a partner at Hawley Troxell, Idaho's largest law firm. His practice areas include cybersecurity, privacy, social media, internet law, e-commerce, technology and software licensing, patent counseling, trademarks and domain names, copyright, Information Technology (IT), media law, computer law, trade secrets, and related transactional work and litigation.